Provisional tax Q&A
Completing tax returns can be tricky, especially when tax laws change from year to year. Salaried employees have it relatively easy as their tax is submitted by the businesses that employ them. However, provisional tax payers have a greater responsibility when it comes to reporting on their earnings and submitting returns.
Our accounting and tax consultants have compiled a quick-reference Q&A to assist you.
When am I considered a provisional tax payer?
If you earn income, such as consulting fees, freelance fees, rental income or interest income, in your personal capacity, you are considered a provisional tax payer. This applies even if you earn an additional salary because all income has to be declared. Most business owners typically are provisional tax payers even if they draw a fixed salary from the business.
How many returns do I need to submit?
Provisional tax payers need to submit a total of three returns annually. Two are provisional tax returns that estimate your earnings for the next 6 months. These are known as IRP6 returns. Your income tax return will calculate your tax responsibility based on your actual earnings and is submitted once a year. This is an ITR12 return.
How do I estimate my provisional tax if my income fluctuates?
Most assessments are either based on historical earnings, i.e. what you earned in the past six months, or a forecast – this is usually the case if you have secured contracts for the next six months. However, be aware that if you estimate a low income and your actual income ends up being significantly higher, you could be penalised for under-declaring your income. Best practice is therefore to submit what is most likely to be an accurate estimate of your earnings.
When do I need to submit each return?
Provisional returns are usually due in March and August each year and the provisional payments due with each return need to be made at the end of those months. The assessed tax return is usually due at the end of February each year.
How do I make tax payments to SARS?
Payments can be made via EFT and most banks have SARS as a public recipient. Be aware that provisional and assessed taxes are paid into different accounts, so be sure to check that you have the details correct. It is also essential that you insert the correct reference number so that your payment can be accurately traced and linked to your tax number.
What deductions are allowed under provisional tax?
While this changes from year to year, typically expenses incurred while earning an income can be deducted. If you have rental income, this may include maintenance and repairs on the property. If you are a freelancer and have office space, your office rental and travelling expenses could be deducted. It is worthwhile consulting with a registered tax consultant to ensure you optimise the deductions allowed while still maintaining tax compliance. An income tax consultant keeps up to date with changes in tax laws and can provide advice. This is very useful, because if you deduct more than is allowed or items not allowed, you could be penalized. Ignorance, unfortunately, is not seen as an acceptable defense by SARS, so it is worthwhile getting professional advice.
If an accountant submits my returns for me, are the consultancy fees tax deductible?
Yes, they are. Accounting fees are seen as an expense and can be deducted before taxable income is calculated for a tax return.
How does capital gains tax work with provisional tax?
Capital gains tax is typically payable when a major asset such as a property is sold. As a provisional tax payer this can be included in your provisional and income tax assessments. The calculation will be based on the proceeds less the base cost, less the annual allowed exclusion (currently R40 000). This amount will then be entered into the field for sundry amounts on the IRP6.
If I earn a salary and sell a property, do I need to register as a provisional tax payer?
If it is a once-off event, you do not need to register as a provisional tax payer. The capital gains tax can be included in your annual return.
Being a provisional tax payer has benefits as you can offset expenses incurred in earning an income. However, it’s worthwhile consulting with an income tax consultant who can advise on the best way to optimise the tax you pay and ensure you are submitting accurate returns.
Find out more about Grid Forensic Accounting’s Tax Management Consulting service which applies to individual, business and trust taxes. We solve, so you don’t have to.